IDOR announced on February 28, 2019 that it too would grant an extension to the March 1 deadline for farmers and fishermen who did not make estimated tax payments by January 15, 2019. These farmers...

Tax Reform Push Begins in Earnest, But Still No Details

September 29, 2017

Kristine A. Tidgren

First there was the Blueprint, then the Bullet Points, and now the “Framework.”[i] On September 27, the White House, the House Committee on Ways and Means, and the Senate Committee on Finance made public an outline of their proposals for long-awaited tax reform. While accompanied by fanfare and superlatives, the new Framework provides no more detail than earlier outlines. Consequently, it’s impossible to predict who would win or lose or stay the same under any future tax reform. The announcement will usher in a season of intense tax legislation drafting in the Committees, as well as much policy debate, including concerns about the deficit and just who will be helped or hurt as vague proposals evolve into cold, hard tax bills.

Individuals

Collapsing the Tax Brackets

The plan calls for reducing the current number of tax brackets from seven to three. The new brackets would be set at 12%, 25%, and 35%. No details are given as to the all-important income cutoffs accompanying this new rate schedule. The Framework says that it “envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets.”

Because of the lack of specificity, it’s impossible to predict how this change would impact taxpayers. Unlike earlier proposals, the Framework leaves open the possibility of a higher tax rate by stating “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”

Increasing the Standard Deduction and Eliminating Personal Exemptions and Most Itemized Deductions

The Framework boasts of simplifying the tax code and allowing postcard filing for the majority of Americans. It also aims to create a larger “zero tax bracket” by doubling the standard deduction to $24,000 for those who are married filing jointly and to $12,000 for those who are single. In exchange for doubling the standard deduction, the Framework eliminates personal exemptions ($4,050 per person in 2017) and the additional standard deduction. Also in exchange for the higher standard deduction, the Framework would eliminate most itemized deductions, except for the mortgage interest deduction and the deduction for charitable giving. The often used deduction for state and local taxes, including property taxes, for example, would be gone.

Increasing the Child Tax Credit

To offset the impact of the loss of personal exemptions for some, the Framework proposes to “significantly” increase the child tax credit (although no amount is specified). It would also increase the income levels at which the child tax credit begins to phase out. The proposal also provides that $500 of the credit would continue to be refundable and that a new non-refundable credit of $500 would be offered to those caring for non-child dependents. It should be noted that under current law, the child tax credit only applies to children under the age of 17, whereas the current personal exemption applies to taxpayers and all dependents.

Although this plan is said to benefit “typical middle-class families,” it is difficult to assess its true impact on middle income Americans without more information. It seems likely that some middle income Americans, particularly those who currently itemize deductions and have multiple children, could face higher tax liability under this Framework.

Repealing “numerous other exemptions, deduction, and credits for individuals”

Key Provisions Not Mentioned

The Framework does not mention the IRC §1031 like-kind exchange, a tax provision especially important to agricultural producers and rural landowners. Nor does the Framework reference the taxation of capital gains or dividends, cash accounting, conservation easement deductions, income averaging, or other provisions that can significantly impact farmers.

Repealing the Estate Tax and the Generation Skipping Tax

The Framework specifies that it will repeal the estate tax and the generation-skipping transfer tax. It does not, however, provide any detail regarding this plan. In particular, it does not mention basis adjustment at death, much more important to the vast majority of farmers than the estate tax. Nor does the Framework mention the gift tax, which presumably would remain in some form.

Business Taxpayers

Reducing the Maximum Tax Rate

The Framework proposes to limit the maximum tax rate applied to business income of small and family-owned businesses conducted as sole proprietorships, partnerships, and S corporations to 25%. The vast majority of U.S. businesses, including agricultural operations, are operated as one of these types of pass-through entities. Currently, this business income is subject to the highest individual tax rate of 39.6%.

The Framework suggests there would need to be measures to prevent the re-characterization of personal income into business income, although the “details would be left” to the tax writing committees. Some have suggested that potential entities excluded from this lower tax rate might include private equity funds and hedge funds operated as partnerships, as well as service entities such as law and accounting firms. It also appears that this plan could further grow the “gig economy,” incentivizing workers to get off company payrolls and acquire independent contractor status.

Likewise, the Framework would reduce the maximum corporate tax rate from 35% to 20% and eliminate the corporate AMT. The Framework also suggests that the committees will “consider methods to reduce the double taxation of corporate earnings.” To pay for this reduction, many current business tax breaks would be eliminated.

Immediate Expensing

The Framework calls for the immediate expensing of all depreciable assets, beginning with those purchased after September 27, 2017, and continuing for at least five years.

Business Interest Deduction

Some of the costs of the proposals in the Framework would be offset by a “partial” limitation on the deduction for net interest expenses incurred by C corporations. The Framework leaves open the tax treatment of interest paid by non-corporate taxpayers. Agriculture relies heavily on debt financing. Any limitation of the business interest deduction would mean a tax increase for many farmers.

Eliminating DPAD and Other Business Deductions & Credits

The Framework specifically states that it would eliminate the domestic production activity deduction currently provided by IRC § 199 because it will “no longer be necessary” in light of the “vast” rate reductions. The DPAD deduction has become important to many agricultural producers. It also states that “numerous other special exclusions and deductions will be repealed or restricted.” Specifically, most business credits would be eliminated, except where “budgetary limitations allow.”

The Framework also states that it will modernize “tax rules affecting specific industries” to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.

Again, the specifics remain to be seen.

What’s preserved?

The Framework does say that it will retain the research and development credit and the low income housing credit, two credits that have “proven to be effective” in promoting important U.S. economic policy goals.

Territorial Taxation of Global American Companies

The Framework has abandoned earlier proposals for a border adjustment tax. Instead, it suggests a territorial tax system where foreign profits repatriated to America are exempt from taxation. Foreign earnings that have accumulated overseas under the current system would be treated as repatriated during the transition. The committees will also “incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.”

What’s Next?

Before any tax reform proposals can advance, Congress must pass a budget resolution (with reconciliation instructions) for the 2018 fiscal year. Once that resolution is in place, tax reform could proceed using the budget reconciliation process. It is important to note that legislation passed through the reconciliation process cannot increase deficits for years beyond the budget period.

We’ll be watching as the tax reform process unfolds, particularly with an eye toward any changes that may impact agricultural producers. As we learned with the healthcare debate, it’s easy to talk in generalities, not so easy to put meat on the bones.

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.